Chapter

RETIREMENT EARNINGS TEST

In keeping with their function of partially replacing lost earnings,

Social Security benefits are generally not paid to workers who, while

over the retirement age, continue to have relatively high earnings.

like all other forms of insurance, Social Security indemnifies

for a specific loss. The loss is an individual’s earnings. Accordingly,

it is appropriate for the Social Security law to measure when earnings

have been lost and benefits are payable. The earnings test in current

law does this in a generally satisfactory way. The Commission therefore

recommends that the retirement earnings test be retained.

For older people, the earnings test is a practical way of defining

retirement . The current test allows them a great deal of flexibility.

A worker with relatively modest earnings is still considered fully

tired and receives full benefits; at higher earnings, he or she is

considered partially retired and receives partial benefits during the

year; at still higher earnings, benefits are not paid because the

worker is judged to be not yet retired. When workers reach age 72,

they can receive full benefits regardless of their earnings.

The number of people who lose benefits under the earnings test

is actually quite small. Of the 24.4 million people and older who were

eligible for Social Security benefits at the end of 1979, only 1 mil­

lion--less than five percent--had any benefits withheld under the

earnings Only 400,000 of those affected by the earnings test

received no benefits whatever in 1979.

Development of Earnings Test

There has always been an earnings test in the law, but there has

always been a problem of what it should be. The difficulty of

designing a test satisfactory to all became obvious with the drafting of

the original Social Security Act. The bill that passed the House of

Representatives in 1935 had no test because:

The entire matter (of how to define retirement) was referred to the subcommittee . . . which, after some-thing like an hour’s consideration, in which every suggestion made by anyone to define retirement was rejected . . . as not being sufficiently definite, finally a ted a motion to strike out the provision

The financial savings from the test was not a consideration in the

original House bill, . . in fact there was no discussion of the financial

effects whatsoever. But later, when the bill went to the Senate, the

provision that benefits be conditioned on retirement was restored:

Office of the Actuary, Social Security Administration. Witte, Edwin E., The Development of the Social Security Act, of Wisconsin Press, p. 149. Professor Witte served as Executive

Director of the Committee on Economic Security. This was the Committeeappointed by President Franklin D. Roosevelt to create a Social Securityprogram.

Ibid page 149.

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This amendment was adopted without any dissent. Later on it was quite readily agreed upon by the House conferees, who explained that the House committee had never understood that the amendment . eliminating the requirement of retirement completely upset the actuarial calculations

The original Social Security Act of barred payment of benefits

for any month in which a beneficiary received wages from “regular em­

This provision never went into effect. The Social Security

Board thought that it would be too difficult to determine what was

“regular” employment in different industries and occupations. The

Board recommended a specific monetary amount to avoid administrative

difficulties and make the test objective. The law was changed before

the first benefits were paid in 1940 so that benefits would be with-

held only for months in which covered earnings were $15 or more.

The test has evolved in stages from a monthly test to an annual

one. Until the Social Security Amendments of 1950 provided an exemp­

tion for people age 75 and over, the earnings test applied to all bene­

ficiaries. When Social Security coverage was extended to the

employed, it was thought that many of them might never retire and as

a consequence would pay Social Security taxes but receive few or no

cash benefits in return. The 1950 Amendments, therefore, provided

that the test would not apply after age 75. Subsequent amendments

lowered the age to 72 and, effective in 1982, to age 70.

How the Earnings Test Works

The present earnings test consists of four parts.

I b i d . , p. 160.

An Annual Exempt Amount Annual earnings up to a specified

amount are exempt from the test; a beneficiary whose earnings do not

exceed this exempt amount gets full benefits throughout the year.

There are two different exempt amounts, depending on a person’s age:

(1) For people aged 65-71 (age 69 beginning in the annual

exempt amount is $5,000 in 1980, $5,500 in 1981, and $6,000

in 1982. Beginning in 1983, the annual exempt amount will

be automatically raised to reflect increases in average wage

levels.

(2) For people under 65, the annual exempt amount is $3,720 in

1980 and $4,080 in 1981. Beyond 1981 it will continue to in-

crease automatically to reflect rises in average wage levels.

It is estimated that, in 1982, the exempt amount for those

under age 65 will be $4,440 compared to $6,000 for those

aged 65-69.

Reduction in Benefits if Earnings Exceed the Annual Exempt Amount

One dollar in benefits is withheld for each $2 of annual earnings

above the exempt amount. Earnings above this amount reduce the worker’s

benefits and any benefits for a spouse or child who is entitled to them

because of the worker’s earnings record. When spouses or children who

are entitled to benefits work, their

benefits.

Under the $1 for $2 reduction, beneficiaries can have relatively

high earnings and still receive some benefits. They can earn an .

amount equal to the applicable exempt amount for their age group plus

twice their annual benefits before all of their benefits are withheld.

Table 6-l illustrates this. A man age 65 in 1980 who always earned the

national average wage could earn as much as $16,725 before all his

benewould be withheld. If he had a wife age 65 eligible for on

his record, he could earn as much as $22,588 before all the couple’s

benefits would be withheld.

A Monthly Test In the first year of entitlement to benefits, under

most circumstances a special provision allows benefits to be paid for

months in which wages are not more than one-twelfth of the annual

exempt amount and the beneficiary does not render substantial self-em­

ployment services. This allows workers who retire mid-year to receive

benefits after retirement, regardless of earnings earlier in the year.

An Exemption On Account of Aqe Beginning with the month in

which a person reaches age 72, benefits are payable regardless of

earnings. This age is scheduled to drop from 72 to 70 in January

1982.

Recommended Changes

The Commission believes the earnings test serves a useful role in

defining the purpose of the Social Security program and in limiting its

costs. The scheduled change from 72 to 70 in the age at which the

earnings test no longer applies was a part of the 1977 Amendments to

the Social Security Act. The Commission believes that this change

would erode the usefulness of the test as a measure of retirement.

It, therefore, recommends that the scheduled reduction in the exempt

age from 72 to 70 be repealed before it goes into effect in 1982. ­

While the Commission believes that people who are not retired

should generally not be paid Social Security retirement benefits, it

recognizes that those whose benefits are withheld because of the test

forego not only this benefit income, but also the tax-exempt treatment

which it is accorded. Social Security benefits are not subject to the

Federal income tax, while earnings are. To treat older workers more

equitably, the Commission is recommending a partial refundable Federal

income tax credit for people 65 and older who have benefits withheld

under the earnings test. ­

Why Other Chanqes Are Not Recommended

There are several reasons why the National Commission supports

retention of the retirement earnings test. The cost of eliminating the

test is high, with benefits going to only a small proportion of Social

Security beneficiaries who are likely to be among those with higher

income and earnings. Elimination of the earnings test would therefore

help those ‘who need it least. The Commission does not believe that the

cost will be offset by revenues from additional income or payroll taxes.

A/ See supplementary statement on the retirement earnings test by Cohen.

See the discussion and dissenting statement on this issue in 5.

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It does not believe that the earnings test is as influential in the retire­

ment decision as is often claimed. Elimination of the test before age 65

would not be good pension planning. Nor, in the opinion of the Comm

ssion, is the test unfair in considering only earnings and not other

income. However, the Social Security program would appear unfair to

younger workers who pay the tax if some of their taxes went to older

workers who were earning as much or more than they.

cost

Cost is an important factor in the Commission’s recommendation to

retain the earnings test. It is estimated that repeal of the earnings

test would increase program costs by $6-7 billion in the first year and

more in future years. Even if the test were repealed only for those

age 65 or older, the first-year cost would be about $2 billion. The

Commission believes that this is not a desirable or prudent use of Social

5 /Security revenues .-

It is sometimes suggested that the cost of repealing the test could

be made up by the additional Federal income and payroll taxes that

would be generated. This is very unlikely. People who can earn high

wages already have a strong incentive to work; they are likely to be

working now if there are jobs available. Therefore, this group is

already paying most of the taxes they would pay if the test were elimi­

Older workers whose earnings are at or near the exempt

The long-range costs are percent of taxable payroll for complete elimination of the test and percent of payroll for eliminating it only after 65.

amount might work more if there were no earnings test, and if the work

were available. But they are not likely to pay large amounts of income

taxes because income below certain levels is also exempt from the income

tax and those over 65 are treated very favorably under this tax.

Who Gains From Elimination of the Test?

The Commission considered the kinds of objections that are raised

to the earnings test. It is sometimes said that the test discourages

older people from working. While this may be true in some cases, it is

not likely to affect most workers.

Those with high earning capacity have far more to gain by working

than by retiring on Social Security. Their potential gains from earnings

far exceed their potential Social Security benefits. They are also

usually covered by private pension plans, and

plans are often more important to them than Social Security when they

are deciding when to retire.

Those who have had low-paying jobs throughout their lifetime often

lack pension rights or significant savings in old age. The exempt

amount of the present test permits them to make significant supplements

to their retirement benefits. The annual exempt amount for those 65 or

older is more than the private pension that covered workers

receive, and it is almost as much as the full-time wages of lower-paid

workers. A worker who always earned

continue working full time and still receive at least 80 percent of his or

her retirement benefits. Very low-paid workers significantly

affected by the earnings test.

d

what is most striking is that the decision to retire is not often seen as a voluntary one. Retirement is something that happens to people, usually at a particular age or because of a particular health situation. Most retirees see themselves as having had relatively little choice

If this is true, it is unlikely that repeal of the earnings test would

cause a large number of people to return to work.

The Commission believes that further efforts to encourage older

people to work should focus on the delayed retirement credit and the

tax treatment of earnings after 65, as recommended in Chapter 5.

Increasing this credit is a better way to assure adequate retirement

income than liberalizing or eliminating the earnings test. The delayed

retirement credit raises benefits after retirement. Liberalizing the

earnings test pays higher retirement benefits on top of pre-retirement

earnings.

The Relationship to Good Pension Planning

For people who are 62 to 64 and do not retire, elimination of the

earnings test would present a significant long-run disadvantage. Most

would be likely to claim benefits when they reach 62 since the benefits

would no longer be affected by earnings if there were no earnings test.

Benefits are substantially reduced, however, if they are claimed before

age 65. Benefits might be perceived as a “windfall” while full earnings

A Nationwide Survey of Attitudes Toward Social Security, a report pared’for the National Commission on Social Security by Peter D.

Hart Research Associates, Inc., 1979, p.

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